On Our Radar

On Our Radar

Why Families Aren't Saving Enough for College

The seemingly-endless rise in college tuition along with the unstable economic recovery and stagnate wages has made the battle to save for college tough on families.

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According to the Federal Reserve, student loan debt stood at $956 billion in November, an increase of $42 billion from the previous quarter. What’s more, the delinquency rate for student loans is around 10%.

“When you look at consumer debt, 76% of it is tied to housing and the next biggest category is student loans,” says John Kenney, head of Legg Mason Global Asset Allocation. “With all the default issues, it’s a good example of how pervasive student loan debt is and how important is to find a way to plan for it.”

Whether it’s because they underestimate the cost of college or they overlook cost-reduction strategies, parents and students are increasingly taking out large loans to help finance higher education. Legg Mason polled more than 1,000 parents to identify the top five reasons parents aren’t saving enough for college.

Mistake No. 1: Underestimating Costs

Predicting the actual cost of a four-year degree in five, 10 or 15 years is hard can be downright scary, and is a top reason respondents cited not saving enough.

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According to Kenney, parents of a two year old would have to put about $520 (assuming a 6% return on the savings) in savings a month to cover the cost of college education. If they choose to wait until the child is 7 or 8, and the amount needed to be saved each month jumps up pretty dramatically. “Saving earlier rather than later is very important,” he says.

Mistake No. 2 Overlooking Cost-Reduction Strategies

Every parent dreams of sending their child to a top school, but the big-named schools don’t come cheap. According to Kenney, only 15% of survey respondents limited the choice of colleges based on what they can afford.

Many parents and students also overlook the strategy of going to a community college for the first two years to complete basic core classes and then transferring to a university to reduce the total cost of the education.

Mistake No. 3 Not Taking Using Tax-Advantaged Investment Vehicles

There are many tax-advantaged savings vehicles to help save for college, but the Legg Mason survey found many parents aren’t using them.

Kenney says many parents don’t utilize investment vehicles like a 529 college savings plan, which enables the investment to grow tax free.

Mistake No. 4 Relying too Much on Loans

Students and their families often take out too much in loans, not realizing the amount they will eventually have to pay back.

“Interest rates cost money and also impact your future economic decisions,” says Kenney. While there are low-interest government loans available, it may not be enough to cover all of the tuition leaving parents and students relying on loans from financial institutions which charge a higher interest rate.

Mistake No. 5 Lack of Guidance from Financial Advisors

Respondents of the Legg Mason survey all had investable assets of $250,000 or more, yet many of them cited a lack of guidance from their financial advisor as the reason they hadn’t saved enough for their children’s college education.

According to Kenney, the majority of people that that cited insufficient guidance as a reason, said they had to approach the topic of college savings first instead of the advisor. “College savings is not high on the list of things financial advisors think about,” he says, making it even more crucial for parents to take an active role.